FXStreet reports that falling inflation means the Reserve Bank of New Zealand (RBNZ) needs to take vigorous action. The RBNZ's next tool will be a negative OCR combined with loans to banks, and economists at Westpac expect this will be deployed next year. The RBNZ’s aggressive monetary policy will dampen the rise and rise of the kiwi.
“The outlook is clear: inflation is set to fall, and the RBNZ will need to act aggressively if it is to meet its targets. We now have confirmation of the predicted plunge in inflation, with the annual rate stepping down from 2.5% to 1.5% at the June reading. We forecast that inflation will drop to 0.2% next year, and will remain below 1% until mid-2022.”
“The RBNZ estimates that, in order to return inflation to 2% and reach full employment, it will need to deliver monetary stimulus equivalent to an OCR of -2% over a period of two years. The RBNZ is planning to achieve the equivalent of a -2% OCR by setting the actual OCR at 0.25% and buying about a billion dollars per week worth of bonds under the Large Scale Asset Purchase (LSAP) programme (money printing).”
“We have long been of the view that the RBNZ will cut the OCR to -0.5% in April next year. For some months we have been the only bank forecasting a negative OCR. However, the idea is now likely to gain broader acceptance after the RBNZ said in its August MPS that a combination of a negative OCR and a term lending facility for banks (low-interest loans) is its preferred next monetary policy tool. We are now forecasting that the OCR will return to positive territory only in 2023, and will rise only slowly after that.”
“The key global exchange rate trend has been weakness in the USD, and this is likely to continue due to the ongoing spread of Covid-19 in the US. However, the NZD could experience weakness of its own, if the RBNZ continues with its aggressive quantitative easing and adopts a negative OCR, as we expect. We see no reason to forecast large moves in either direction for the NZD/USD exchange rate, particularly because this exchange rate is currently very close to its long-run inflation-adjusted average.”
“New Zealand’s more aggressive approach to monetary stimulus will probably set it apart from Australia. We expect the NZD/AUD exchange rate to fall from its current high level to around 88 cents at the time New Zealand moves to a negative OCR, which would bring the cross closer to the historical average.”
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